Designing a just transition investment fund for Ukraine

THE BACKGROUND

Before the war, a GIZ Just Transition initiative was launched to support Ukraine in structural changes related to the coal phase-out.

Until 2014, coal represented over a third of the country’s primary energy supply due to Ukraine’s vast coal reserves, the 6th largest worldwide. Ukraine has about 3.3% of the world’s coal deposits. The share in GDP (mining and quarrying) was 6.5% before the war (2019). Coal’s share in Ukrainian primary energy production was equal to 26.4% before the war (Ukrstat, 2020). Coal covered a significant part of the primary energy consumption by households, public buildings, and industry. Still, coal burning releases about 75 million tons of CO2-eq annually, and methane emissions by coal mines equal 11 million tons of CO2. The economic arguments that spoke for the phase-out of state-owned coal mines in Ukraine were supplemented by significant environmental arguments that strongly supported Ukraine's withdrawal from coal-based electricity production.

While energy security objectives increase domestic coal production's relevance, the critical state of the Ukrainian public finances creates an even stronger imperative than before to close in-efficient state-owned mines running on subsidies. Moreover, the 2022 massive military aggression of the Russian Federation against Ukraine has led to severe damage to the mining industry. Many of the country’s coal mines are located in temporarily occupied territory or close to combat zones. Some have been irreversibly damaged, and many are inoperative, thus requesting an intervention to move to other sources of energy.

The 2050 energy strategy (draft 2023) confirmed the need to transition to clean energy in a war context. The potential for renewables, particularly wind and solar, is huge. Additionally, biomass holds considerable potential thanks to Ukraine’s large agricultural sector. Of course, the faster military actions are concluded, the higher the likelihood of coal phasing out.

THE PROJECT

The project aimed to support the Ukrainian government in setting up a financing mechanism to support the just transition agenda in Ukraine. In particular, the new financing facility would target the 25 coal municipalities existing in Ukraine. The principal mines are concentrated in the East in the Luhansk, Dnipropetrovsk, and Donetsk Oblasts. Several coal-fired generation communities are also identified. These 25 communities represent about 1 million inhabitants. They host 33 state-owned mines (economically unprofitable and subsidized) and 12 private ones. About 62,000 people work directly or indirectly in these mines, including 35,000 miners. Municipalities of the Donetsk and Luhansk regions, and partly Dnipropetrovsk oblast, are located in the conflict zones and/or are operated by a military administration, thus limiting intervention in the short term.

Our goal was to create high-quality evidence on the nature of needs at the municipal level to justify an appropriate ‘fund design’. The options for setting up a new facility were diverse, and we did not propose to refer to any out-of-the-shelf option.

THE RESULTS

FINANCE FOR IMPACT provides advisory services for the design of a Just Transition fund covering 25 coal municipalities. As part of our study, it was required to collect an essential amount of credible quantitative evidence at the municipal level in Ukraine. Several datasets were compiled and analyzed on the coal regions and municipalities, their market needs and financing gaps, etc. These metrics were used to prioritize needs and interventions for the Just Transition fund and assess what could be the pipeline of scalable/bankable projects in the short term. In this last part of our assessment, we proposed a design for the new facility, including a clear implementation plan and roll-out strategy covering capital structure; governance model; risk management; products and services (including terms and conditions); sector orientation; results to be achieved; leverage to be created for the facility to be sustainable; etc.